ABSTRACT
The international agent issues pollution rights at the beginning of the current period equivalent to the volume of pollution it determines the biosphere is capable of assimilating during the current period at the pre-existing target level. In this fashion, the volume of pollution at the end of the current period will once again equal the target amount. Both non-financial business sectors purchase these pollution rights. The market price for pollution rights is established at the point at which the sum of the (net) demands for pollution rights by the two non-financial business sectors is equal to the target volume issued by the international agent. The demand for pollution rights by an individual sector is equal to the amount of pollution it wants to create in extracting and using its own nonrenewable resource minus the amount of pollution abatement it wishes to produce at the current price of pollution rights. The demand for pollution rights by an individual country’s non-financial business sector may be negative, in which case that sector decides to clean up more pollution than it creates, thereby earning an income from that operation. (We may view the international agent as paying that sector the market price of a unit of emissions rights for every unit by which that sector reduces the level of pollution. The international agent would then sell emissions rights to the other country’s non-financial business sector equal to the assimilation level plus the amount of pollution abatement bϕy the first country.)
